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Are Rental Homes the New Asset Class for Wall Street?

The wizards of wall street are back with a new twist.

Certain venture capital companies are promoting a “new” asset class to be sold as securities… single family rental homes!

Remember the last time Wall Street created a new asset class? That’s right, they packaged up single family mortgages and sold them as securities. And, we all know what happens when bad government policy and Wall Street financial experts conspire to take advantage of Main Street… don’t we?

Yes, you’re reading this correctly. Instead of packaging up and selling the underlying mortgage as a security, which led to the 2008 economic collapse, Wall Street is packaging up the rental home itself as a publicly traded REIT (Real Estate Investment Trust). Like a mutual fund, a REIT is a so-called “professionally managed” collective investment scheme that pools money from many investors to purchase securities.

Big Opportunity or Just Another Way to Take Your Money?

CNBC recently interviewed several real estate oriented venture capital firms on camera. A principal at Colony Capital explained that “this is the biggest opportunity we’ve seen in our careers”. Colony, along with Carrington Holdings will be launching a publicly traded rental REIT sometime next year.

Colony Capital is estimating that as many as 6 to 7 million more homes will go into foreclosure over the coming years and be available for acquisition. Right now, along with a number of other firms, Colony and Carrington are out in the marketplace snapping up as many single family homes as they can get their hands on.

Translated into Main Street language, the comment that “this is the biggest opportunity we’ve seen in our careers” simply means “there’s lots of money pouring into this investment sector and we want to make sure we get as much of it as possible”.

Pioneers?  Really?

What really caught my attention in the CNBC video is the fact that the hosts of the CNBC segment characterized these companies as “the Pioneers of an exploding new asset class… single family rentals”.

For more than 35 years there have been real estate investors, both individuals and companies, that have bought single family homes, rehabbed them and put tenants in place either for themselves or for other investors. We call the process “redevelopment”.

So, what does CNBC mean when they use the term “Pioneers”?  Perhaps they mean it in the sense of “finding a new path to extract more money out of unsophisticated investors”.

Between 2000 and 2007, real estate “speculators” were purchasing single family rental properties purely for appreciation… a very dangerous game, as many found out. And, our Wall Street friends joined the party by concocting a scheme to package up toxic mortgages and sell them off as AAA rated securities… commonly known as Mortgage Backed Securities. They then sold off these securities to “unsophisticated investors” in the United States and around the world.  Now, they’re doing it all over again.

The Real Question

There’s no doubt that investing into single family home rentals is an excellent investment. But, if you want to acquire this type of property to hold either in your self-directed retirement plan (i.e. IRA, 401k) or with personal funds, who do you want to handle it for you… the Wizards of Wall Street, or local experts who have decades of experience working in the realm of single family rental homes?

  1. Comment by Jewel
    August 23rd at 7:49 am 

    How do I purchase stocks in this Single Family Rental Home REIT? What are the stocks selling for?

  2. August 24th at 12:05 am 

    I like how you pointed out in the article these companies are being referred to as “the Pioneers of an exploding new asset class… single family rentals”. I would have fallen out of my chair laughing if it weren’t for the sheer fear of having these “talking heads” telling people this is something new… something that the average person can’t do. Of course they are going to pimp wall street, the major media outlets are their best form of advertising to the masses. But, as we all know… When investing in anything its seldom a good idea to give up control. And, that’s just what you do when you invest in a publicly traded reit. Plus, the returns are going to be a fraction of what you would get by building a portfolio you own and hiring a property manager. Not to mention loss of all the other advantages of direct ownership like tax breaks and appreciation.

  3. Comment by Giovanni
    August 25th at 9:44 am 

    One of my private equity clients was asked to advise one of the ‘Pioneers’ about the viability of the financial model for their REOs-to-Rentals program and found that they don’t pencil. The biggest thing was that properly budgeting for maintenance and repairs plus setting aside reserves for replacements reduced the cash flow to the extent that they couldn’t hit their internal return target. So guess what? They decided to spin it off into a REIT just as Marco points out in his post. My guy knows his numbers too because one of his projects is managing a 15 house test portfolio of REOs-to-Rentals for the fund.

    The most ironic thing about the whole RtR thing is that managing and making money from scattered single family properties is so difficult that most real estate investors eventually move onto apartments or other commercial real estate where centralized logistics and economies of scale can really help. For more on this see my post from yesterday here:

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